Liberty. It’s a simple idea, but it’s also the linchpin of a complex system of values and practices: justice, prosperity, responsibility, toleration, cooperation, and peace. Many people believe that liberty is the core political value of modern civilization itself, the one that gives substance and form to all the other values of social life. They’re called libertarians.

Thursday, October 18, 2012

The Fed’s mission creep

The Fed’s mission creep

DALLAS
In the 1920s, in the wee small hours of the mornings, employees
at the Federal Reserve Bank of Dallas sang while they worked. One, Jack
Culpepper, went into vaudeville, where he teamed up with a dance
partner named Ginger. They married and performed as “Ginger and Pepper.”
But show-business marriages are perishable, so Ginger Rogers found
another dance partner, Fred Astaire.

Richard Fisher,
president of the Dallas Fed, who calls the legendary dance team “Fed
and Ginger,” defends the Fed as an institution as vigorously as he
questions its current policy. He prefers policies more suited to the Fed
as it was before it acquired the burden — and temptation — of the dual
mandate. Hence his praise for legislation by another Texan, Republican
Rep. Kevin Brady.

Before
the Fed was created 99 years ago, the U.S. economy was in recession 48
percent of the time; since 1913, it has been in recession only about 20
percent of the time. The Fed has done much good. It cannot, however, do
every good thing, although Congress now seems to think it should.
In July, Fed Chairman Ben Bernanke testified to the Senate, where one of Fisher’s Harvard classmates, the ineffable Chuck Schumer
(D-N.Y.), clearly hoping the Fed would give the economy a pre-election
boost, exhorted Bernanke: “The Fed is the only game in town.” Good
grief.
Is Congress a spectator at the game of governance? Does it
have anything to do with tax rates, spending levels and health care and
other policies that have U.S. businesses, in Fisher’s words, “inundated
with regulatory overload”? Expecting — no, mandating — the Fed to
perform the irreducibly political task of managing economic policy means
off-loading legislative responsibilities. And this inevitably involves
what James Bullard,
Fisher’s counterpart at the Federal Reserve Bank of St. Louis, calls
the “creeping politicization” of the Fed, a worry Fisher shares.
For
the first 64 years of its existence, the Fed’s mandate was price
stability — preserving the currency as a store of value by tightly
controlling inflation. But in 1977, Congress stipulated maximizing
employment as the Fed’s second mandate. Fisher thinks “a single mandate
would serve our country best.” Brady’s Sound Dollar Act, which has 48 House sponsors, would restore the single mandate and make other changes Fisher favors. For example:
Fisher
began his career with Brown Brothers Harriman, the private bank, and
later was notably successful as founder and manager of several
fund-management firms. He knows whereof he speaks when he speaks of
capitalism. And of New York, which he enjoys calling “flyover country”
with the New York Times as its “local newspaper.” He says the Fed,
through its regional banks, was “designed for us to be Main Street’s
voice.” Brady agrees that today’s membership on the policymaking Federal
Open Market Committee — seven members of the Reserve Board, the
president of the New York Fed, and rotating four of the presidents of
the regional banks — gives excessive weight to New York and Washington.
The Sound Dollar Act would give permanent FOMC voting rights to all 12
of the Fed bank presidents.
Two months after Schumer’s exhortation, the Fed announced a “highly accommodative stance of monetary policy,” meaning expanding the money supply by buying $40 billion of bonds every month for an undetermined number of years,
lasting “for a considerable time after the economic recovery
strengthens.” Bernanke was appointed by President George W. Bush; his
second term expires Jan. 31, 2014, in what could be the second year of a
third presidency. And the policy he has announced may continue when he
departs.
“This is a ‘Main Street’ policy,”
Bernanke says, about “trying to get jobs going.” The theory is that
expanding the money supply will further drive down interest rates, which
somehow will prompt hiring and investing. Fisher is skeptical and fears
that such government fidgets might exacerbate today’s paralyzing
uncertainties. The United States, he says, has the world’s “most
muscular business community,” but capital is “on the sidelines” — $1.4
trillion in excess bank reserves, $2 trillion on the books of S&P
500 companies — because businesses “do not know what their cost
structure is going to be.”
Thanks to prior “highly accommodative”
policies, the economy’s “gas tank is full, if not more,” but it is
unclear “who is going to step on the accelerator.” Perhaps no one will,
as long as the Fed is regarded as “the only game in town.”